What is SOFR?
SOFR (Secured Overnight Financing Rate) is a benchmark interest rate used to measure the cost of borrowing cash overnight collateralized by U.S. Treasury securities. It is administered by the Federal Reserve Bank of New York and is based on the transactions of the tri-party repo market. SOFR is intended to replace the London Interbank Offered Rate (LIBOR) as the primary benchmark for short-term interest rates.
History of SOFR
SOFR was introduced in April 2018 as part of the Federal Reserve’s efforts to transition away from LIBOR. LIBOR had been the primary benchmark for short-term interest rates since the 1980s, but it had become increasingly unreliable due to a lack of transactions in the underlying market. SOFR was developed as a more reliable alternative, as it is based on actual transactions in the tri-party repo market.
Comparison of SOFR and LIBOR
| Rate | SOFR | LIBOR |
|---|---|---|
| Administrator | Federal Reserve Bank of New York | ICE Benchmark Administration |
| Underlying Market | Tri-party repo market | Unsecured interbank lending market |
| Transactions | Actual transactions | Estimated transactions |
Summary
SOFR is a benchmark interest rate used to measure the cost of borrowing cash overnight collateralized by U.S. Treasury securities. It is administered by the Federal Reserve Bank of New York and is based on the transactions of the tri-party repo market. SOFR is intended to replace LIBOR as the primary benchmark for short-term interest rates. For more information about SOFR, visit the Federal Reserve Bank of New York’s website or the U.S. Treasury’s website.
See Also
- LIBOR
- Overnight Index Swap (OIS)
- Repurchase Agreement (Repo)
- Treasury Repurchase Agreement (T-Repo)
- General Collateral Finance (GCF)
- Federal Funds Rate (FFR)
- Overnight Bank Funding Rate (OBFR)
- Secured Overnight Financing Rate (SOFR)
- Overnight Reverse Repurchase Agreement (ON RRP)
- Overnight Treasury General Collateral Rate (OTGC)
